Winning the trophies nobody wants

And it's not just a local perception. When international organizations look at Colombia, they nod their heads and confirm the suspicions. A report from the United Nations Development Programme (UNDP)\ summed it up like this:

In many dimensions the Colombian tax code violates desirable principles of taxation: it is long and complex, falls excessively on companies rather than individuals, entails enormous horizontal inequities, plays an almost nonexistent role in income redistribution, and faces high rates of evasion.

In the global ranking, Colombia also shines, but not for the right reasons. The 2024 Tax Complexity Index \ placed us at number 10 among the most tangled systems in the world. We are on the complexity podium, ahead of giants like China and the United States.

Types of taxes

To avoid getting lost in this labyrinth, it is essential to understand how taxes are classified. The first key distinction is made between direct and indirect taxes. Direct taxes are levied directly on the person or company required to pay them. This means the tax is calculated based on the taxpayer's economic capacity, such as their income or their assets. In this case, the individual or entity is fully identified and is the one who bears the burden of the tax. The clearest example is the Income Tax.

On the other hand, indirect taxes do not fall on a specific person, but rather tax transactions, mainly the consumption of goods and services. These taxes are included in the final price of products. The one who collects them for the State is the seller or the company, but the one who ultimately bears the cost of the tax is the final consumer every time they make a purchase. The quintessential example is the Value Added Tax (VAT), which is applied to a good regardless of who buys it.

The second key distinction has to do with fairness and economic impact. Here we talk about progressive and regressive taxes. A progressive system follows the logic of "those who have more, contribute more to the party." In other words, if your income increases, the percentage you pay in tax does too. The Income Tax for individuals is, in theory, the good guy of this movie.

At the opposite extreme are regressive taxes, which are like the cover charge at a nightclub: they charge the same to the student who arrived by bus and to the millionaire who parked a Ferrari. By having a single flat rate that does not discriminate based on ability to pay, they affect those who have the least proportionally much more.

The Great Paradox

In a country that desperately needs companies that generate jobs, the tax system seems designed to make life difficult for them. The tax burden falls disproportionately on legal entities. The general income tax rate for companies is 35% of their profits. To put it in perspective, according to the OECD, it is the highest rate in the entire club of "good economic practices"\. It's as if Colombia wanted to be the heavyweight world champion in corporate taxes, a title that scares away investment and leaves companies with less capital to grow, innovate, and, yes, create more jobs.